Satyam Computer Services Limited Controlling the Confirmation Process MARK S BEASLEY FRANK A BUCKLESS STEVEN M GLOVER DOUGLAS E PRAWITT LEARNING OBJECTIVES After completing and discussing this case you should be able to 11 Understand common procedures used to audit cash including proper confirmation procedares 2 Identify audit documentation requirements especially once an audit is complete 3 Recognize consequences that can be imposed on an audit firm subsequent to PCAOB enforcement action 41 Understand the SECs oversight authority for companies that trade shares on US stock exchanges as American Depositary Shares ADS 5 Recognize how membership in a network of firms might impact a member accounting firm INTRODUCTION It was like riding a tiger not knowing how to get off without being eaten according to Satyam Computer Services Limited Satyam former Chairman B Ramalinga Raju soon after massive fraud involving the companys financial statements was revealed For over five years Raju was at the top of a massive fraud scheme orchestrated by senior executives at the Hyderabad India information technology services company that falsely inflated its cash and cashrelated balances by over S1 billion In an amzzing fraud scheme that went undetected by the companys external zuditors senior executives directed the creation of over 6000 false invoices and manufactured numerous false bank statements to create over 1 billion in fictitious cash balances and other interest bearing deposits Just before the fraud was revealed in January 2009 Satyams shares traded on the New York Stock Exchange NYSE at a price of S935 When trading resumed the next day those shares dropped nearly 85 percent to close at 146 Institutional investors who owned those shares realized losses of over 450 million The audit of cash is often viewed as a fairly simple and straightforward set of procedures Frequently responsibility for verification of cash balances is assigned to newer experienced members of the audit engagement team because of the relative low risk nature of cash related assertions and the objective versus subjective types of audit evidence typically examined So when the fraud was revealed many were left wondering how such a massive fraud involving overstatement of cash balances went undetected by auditors for several years